October 16, 2021

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Coal Stocks Stage A Ghoulish Rally Amid Growing Energy Crises In Europe, China And India

Like a hand from the grave, coal stocks have reached up to seize the stock market’s dominant position among industries, as tight supplies of natural gas in Europe and supply chains issues in China and India have helped to pressurize coal prices.


An industry rife with bankruptcies five years ago has simply trounced the overall market this year. U.S.-traded coal stocks have collectively gained more than 125%, vs the S&P 500’s 17.1% gain.

And the group’s gains have accelerated since the market faltered into its current correction. A rallying Alliance Resource Partners (ARLP) has vaulted more than 160% since Dec. 31. Ramaco Resources (METC) commands a 433% gain. Consol Energy (CEIX) has sailed more than 371% higher.

The top-three ranked stocks in the industry all started the year trading below $10. And analysts remain clear that the industry stays locked in an existential crisis as climate change increasingly redirects Wall Street capital to less noxious energy sources.

But at least one European natural gas benchmark has spiked nearly 400% since the start of the year, after last year’s bitter winter depleted supplies. In the past week, Russian President Vladimir Putin agreed to boost gas supplies to the EU, possibly marking a peak to the natural gas price spike.

Still, wind and other renewables have been unable to cover the energy gap. That has left consumers and governments wondering if the “energy transition” away from fossil fuels is happening too quickly. Meanwhile, coal energy has rushed to fill the breach.

“For an industry that could be dead by 2030, coal stocks have surprisingly done very well in the last couple of months,” said Oanda analyst Edward Moya. “The next move in coal prices will be determined by expectations for winter in Europe and the U.S.”

Coal Demand Rises Amid Energy Crisis

Surges in energy demand have driven supplies dangerously low in India. And the world’s largest coal consumer, China, is expanding its international supply relationships, while hustling to bolster domestic production. But over the longer term, coal demand has trended lower in developed countries, especially in Europe, as they opt for cleaner-burning electric production options.

U.S. coal consumption hit a peak of 1.1 billion tons in 2007 and has been declining since, according to the Energy Information Administration. The National Mining Association estimates consumption fell to 477.4 million tons in 2020, with 91% of that going to electrical production, and about 8% going to steelmaking and other uses.

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Demand for coal further plunged during the height of the coronavirus pandemic. Global coal demand fell 4% last year, the biggest drop since World War II, according to the International Energy Agency. Cheap natural gas led to consumers switching away from using coal to produce electricity. The IEA reported that coal use for power fell 20% in the U.S. and 21% in the EU last year.

But now those figures might be ticking up as Europe and the U.S. scramble for supplemental energy sources.

The EIA sees U.S. coal production hitting 601 million tons this year, up by 66 million tons — about 20% — from 2020 as higher natural gas prices boost demand for coal for electric power.

China Eyes Green Olympics

Meanwhile in China, demand and trade in coal has become more complicated. The sedimentary rock fuels more than 50% of the country’s electricity production. And Chinese leaders have stirred international criticism by continuing to build more coal-fired power plants, despite pledges to lower emissions and reach carbon neutrality by 2060.

But the 2022 Beijing Winter Olympics are just months away. President Xi Jinping has said the games will be “green,” and the city will meet the World Health Organization’s air quality standards.

“It’s not unreasonable to suspect that China has reduced coal consumption purposely to try to clean the air in front of that type of global event where they want to be seen favorably,” said Phil Gibbs, equity research analyst at KeyBanc Capital Markets.

At the same time, many regions of the country are struggling to stockpile more coal, concerned about fuel shortfalls during the upcoming winter. As a result, the impact of the Olympics on China’s energy mix will likely be short-lived.

In addition, news reports Tuesday said China had begun offloading some shipments of coal from Australia. The Chinese government had banned Australian coal last year, after Australian leaders called for an investigation of how and where Covid-19 originated in China.

To compensate for the Australian ban, Beijing reduced the tariffs on U.S. coal, opening up its markets to U.S. producers. Meanwhile, China is establishing new supply relationships and rekindling old ones, purchasing coal supplies from regions such as Kazakhstan and Indonesia.

Nevertheless, the Chinese government imposed reportedly unannounced power blackouts. On Friday, China ordered increased production from mines in its Inner Mongolia and Shanxi regions. Regulators also loosened restrictions to allow coal prices to fluctuate up to 20% above base rates.

Even before the loosened restraint, circumstances helped send China’s producer price index for coal up 57.1%, year over year, through August.

Coal Stocks At Recent Highs

Today’s coal companies have gone through inordinate change over the past decade. Nearly all leading coal miners descended into bankruptcies midway through the decade. They popped back up with new names, and generally as low-priced, thinly-traded stocks after reorganizing. Arch Coal emerged from Chapter 11 bankruptcy in 2016 and has since become Arch Resources (ARCH).

Peabody Energy (BTU) exited bankruptcy in 2017. But the coal stock faced further financial issues amid the pandemic and, before issuing a round of layoffs in 2020, warned that it could default.

While legacy coal companies were emerging from bankruptcy, Ramaco Resources (METC), a metallurgical coal developer, went public in 2017. It was the first coal company to issue an initial public offering in 10 years. Ramaco is currently the No. 2-ranked stock in IBD’s Energy-Coal group, just behind Alliance Resource Partners.

Most Coal Stocks Extended

Metallurgical coal, also known as coking coal, is also a key ingredient in steel production. Electric power generation is the main use, by a wide margin, of coal in America. It accounted for about 92% of the total U.S. coal consumption in the first quarter of 2021, according to the EIA.

However, met coal prices run essentially double that of thermal, making it an attractive market. In addition, met coal tends to earn better environmental, social and governance ratings — the ESG metric that is propelling so much redirection of Wall Street capital.

All five of the industry’s top-ranked stocks are extended. Alliance, Ramaco, Consol and Arch Resources all rebounded from their 10-week moving averages during the week of Sept. 24. Natural Resource Partners is also extended, up 18% following a breakout from a flat base as the Nasdaq skidded lower on Sept. 29.

Peabody has recovered back above its 10-week moving average, and it is four weeks into a consolidation that could potentially become a base.

Investors have little choice but to focus on individual stocks. The last ETF dedicated to coal stocks, the VanEck Vectors Coal ETF, closed up shop in December 2020.

Coal And Green Energy

While coal demand and prices are seeing a resurgence due to short-term energy factors, the longer-term outlook remains cloudy.

The number of coal mines in the U.S. declined to 551 at the end of 2020. That’s an 18% decrease from 2019, and down 62% since 2008, according to the EIA.

And climate change, which is no longer relegated to the sidelines of investors’ meetings, points to increasing pressure from investors on U.S. coal companies.

The IEA rattled the energy industry in May with a report that recommended halting all new spending and exploration on new fossil fuel projects in order to meet the carbon emissions goals outlined in the Paris Agreement.

The focus on climate is part of the still-emerging ESG trend that has become increasingly influential on Wall Street.

Coal’s Future And Price Outlook

Meanwhile, other mining companies are exiting the coal market to mine other minerals amid the green energy focus on reducing carbon emissions. The U.K.’s Rio Tinto (RIO) divested the last of its coal assets in 2018. Brazil’s Vale SA (VALE) is shifting away from coal.

Many of the largest mining companies, like Australia-based BHP (BHP), are working to direct investors’ focus to segments needed in the production of solar, wind and other renewable energy.

Cobalt and rare earth metals go into batteries for electric cars. Commercial photovoltaic solar panels require silver. Copper is important in equipment for generating wind, solar and hydropower.

Meanwhile, as coal stocks rally on the unusual energy mismatch in Europe, and supply chain troubles in China and India, analysts don’t see coal prices staying high in 2022.

“After we get past winter, then coal prices should come crashing back down to reality,” Moya said.

The fundamentals of coal haven’t changed, even as the power industry faces what analysts see as fall-season supply-side issues. Consumers, investors and governments will continue to put pressure on companies to reduce their carbon emissions.

Keybanc’s Gibbs said increases in coal prices “tend to be very temporary.” Met coal prices, for example, surged to $300 per metric ton twice since the financial crisis, only to fall back as quickly as they rose. Gibbs projects met coal prices will fall to between $165 and $180 per ton in 2022.

“If the price of the commodity is frothy and you’ve made money, it’s probably time to take some profits,” he advised.

Follow Gillian Rich on Twitter for energy news and more.


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